Glossary

Interest rate

What is an interest rate?

An interest rate is defined as the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage. It is the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers for keeping money in an account.

Deeper definition

Interest rates are commonly used for personal loans and mortgages, though they may extend to loans for the purchase of cars, buildings and consumer goods.

Lenders typically offer lower interest rates to borrowers who are low-risk, and higher rates to high-risk borrowers. While lenders typically set their own rates, competition for borrowers means lenders within a certain area usually offer comparable numbers.

Aside from a borrower’s risk assessment, several outside factors may influence current interest rates. These typically include inflation, lower money supply or a high demand for credit.

When interest rates rise, the economy may worsens due to a lack of affordable credit. Interest rates can influence corporate profits and government monetary policies.

Interest rate example

Unless a buyer are paying cash for a home, he or likely will take out a sizable loan for a new residence. When the bank offers the loan to the buyer, it will included a mortgage interest rate.

For example, let’s say the house in question costs $250,000. The future homeowner has a down payment of $10,000 in cash, but he or she will need a loan for the extra $240,000.

The formula for determining how much interest he or she pays is: principal x interest rate x number of periods. In this case, the borrower will pay back a total of $305,469 and make monthly payments of $2,546.

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